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YOU'RE IN CHARGE: You the director - His pay packet's bigger than mine!
April 2002
By Graham Palfery-Smith
Transparency over pay policies is about to become law. So sort yours out.
Graham Palfery-Smith's first big deal was the acquisition of a 66-person recruitment business. He got a good price and was chuffed with the deal. Only when he started digging around did he discover that all 66 people were on different pay schemes. “I soon realised why we'd got a good price,” smiles the former chief executive of HW Group (after that first chastening experience, he went on to build a successful quoted recruitment business, partly through acquisition). “All the staff were on a different pay scheme personally negotiated with their employer. Within a year, only about six of them were left; it was the only way to sort it out.”
Extreme perhaps, but Palfery-Smith's early, chastening experiences point to the potential nightmare of running a company without “equalised” pay structures. We all know the story: X employee comes in expecting a certain salary (and perks); in order to attract him, you go along with his demands; a few months later, incumbent Y employee comes banging on your door asking why so-and-so is paid more than they are for doing the same job?
All of this is about to become even thornier under proposals in a proposed employment bill. The bill is currently being passed through parliament. It will bring employee questionnaires in line with previous equal pay legislation. Employees will have the right to ask an employer if they are receiving equal remuneration to that of a named colleague. Much like sex discrimination documentation it will also make it easier for individuals to request key information when deciding to go ahead in taking an equal pay complaint to tribunal.
Other cases reinforce the point. Last year, share analyst Julie Bower was awarded £1.4m in compensation for sex discrimination. A tribunal agreed that the bonus she'd received was not the market rate for a share analyst. And her manager was accused of “picking a figure” from the air as part of a deliberate plan to drive her out.
In another recent case, a camerawoman complained after discovering that her male counterparts earned significantly more for carrying out the same job with the same skills. Agreeing a significant salary increase and an appropriate level of back pay, her employers put the discrepancy down to a recent company merger – when salary bands across the division had not been re-assessed.
“This case highlights the need for all firms to take a good, hard look at their pay system to check they are rewarding all staff fairly,” says Julie Mellor, chair of the Equal Opportunities Commission. “Where performance-related pay systems are concerned, there's an implicit tendency to discriminate against women,” says John Phillpot at the Chartered Institute of Personnel and Development. In a sales environment, for example, a man might appear to be pursuing his goals more aggressively than a female colleague when in fact they're both meeting the same targets.
Employment lawyer Nicola Dandridge says transparency is a step towards breaking down some of the pay taboos: “The more discretion in the pay system, the more discrimination.”
Litigation or no litigation, scattergun pay schemes aren't a good idea. “People talk, even if you try to sanction it,” says Palfery-Smith. “Secretaries will chat to secretaries, salesmen will gossip to salesmen. Remuneration is a big issue in sales-led organisations, in particular, and it can create huge cultural problems.
“Pay schemes become a major issue in acquisitions,” he continues. “It's a particular problem at the top end of organisations. An incoming MD from one company might be paid £150,000 while an incumbent is only paid £70,000. The worst thing you can do in that situation is avoid the issue. Always deal with it as part of the contract negotiations. Under law, you can't drop a salary after the deal is done.
“How do you deal with such issues? You say, ‘this is the way we pay our people. Take it or leave it'. Even if you're paying someone less than they previously earned, you can always tailor the package to make it acceptable.
“One piece of advice: if you do have to make a major adjustment upwards on someone's salary, do it slowly. If you pay it in one big lump, it will hit the multiple that you paid for that business.
“You want to be able to describe your pay structure in one sentence,” says Palfery-Smith. “For example, ‘we pay basic + X commission scheme and we don't offer company cars.'”
“Finally, a word of advice for sellers of businesses. Make sure your books are clean. Any sensible purchaser will look at your pay schemes. The last thing you want is purchasers asking awkward questions.”
Graham Palfery-Smith runs gjps.net, a specialist M&A consultancy. Tel 01689 854654 |
